Staples - Q1 in the Books, A Look Back

"May you live in interesting times."


-Reputed Chinese curse


It has been an interesting start to the year, to say the least, for the consumer staples sector.  The sector's leadership status in a strong tape is certainly an unfamiliar and perhaps uncomfortable position for many investors.


In review, another month in the books and another month of out-performance for our coverage.  On average, consumer staples stocks rose 4.8% in March, with only the household and personal care sector and the tobacco sector lagging the S&P's +3.6% rise during the month.


Staples - Q1 in the Books, A Look Back - Sector Performance 3.29.13


Staples - Q1 in the Books, A Look Back - Consumer Staples ETF  corrected


Packaged food continued its strong performance (+7.0% in March) in the wake of the Heinz transaction, lagging only the protein sector (+9.0%) in terms of monthly performance.


We continue to struggle (based on our conversations with clients it seems many dedicated staples investors share the sentiment) with valuation.  However, we recognize that valuation in and of itself is not a catalyst and that valuation may not matter for periods of time, perhaps extended periods of time.  The simple fact is that a number of staples names have outstripped the multiple that we are comfortable paying for the cash flow stream, even considering earnings upside from potential margin improvement driven by lower commodity costs and improvements in business momentum driven by improved consumption trends.  That doesn't mean that we are in a hurry to run out and short everything, but we caution investors to recognize that at some point, valuation will matter.


Staples - Q1 in the Books, A Look Back - Consumer Staples Forward PE 3.29.13


Staples - Q1 in the Books, A Look Back - Packaged Food Relative PE


This month we have added a look at several quantitative factors in relation to the staples sector.  Keep in mind that all these factors are relative within staples (i.e. smaller capitalization does not meet the technical definition of small cap, but rather represents a name within the lower half of the cap spectrum within staples).

Staples - Q1 in the Books, A Look Back - Beta Chase 3.3.29


Staples - Q1 in the Books, A Look Back - Debt to EBITDA


Staples - Q1 in the Books, A Look Back - Quant Factors   Dividend Yield


Staples - Q1 in the Books, A Look Back - Quant Factors   Market Cap


Staples - Q1 in the Books, A Look Back - Quant Factors   Short Interest


Based on the above analysis, we can develop several themes in terms of what has worked within the staples sector:

  1. In March, lower beta (lower growth, perhaps 2012 laggard) outperformed higher beta names
  2. Higher short interest has been a consistent out-performer in 2013
  3. Smaller capitalization names had a very good month in March
  4. Dividend yield doesn't tell us much of a story - lower yield had a period of out-performance that has since reversed
  5. Higher debt to EBITDA has been a consistent outperformer, likely representing outperformance of lower "quality" names

Bear in mind, the performance of the staples sector has largely been absent any significant, positive EPS revisions.  Further, absent any material change in business momentum or margins, consensus estimates should head lower on the strength of the dollar to the extent a company has businesses outside the U.S.  While we acknowledge the impact of translating a set of results from one currency to the next is largely irrelevant to the value of a business, optics do matter.


Staples - Q1 in the Books, A Look Back - EPS Revision Chart


Revisiting an analysis from last month, we see that performance was balanced across PE quartiles, with the modest relative under-performance in higher multiple names largely caused by BNNY's monthly performance (-9.5%).  In fact, it was nearly impossible to find a consumer staples stock that didn't go up in the month of March.


Staples - Q1 in the Books, A Look Back - Monthly Performance by Quartile 3.30.13


Similar to last month, multiples expanded across all quartiles.


Staples - Q1 in the Books, A Look Back - PE by Quartile 3.30.13


In keeping with a familiar theme, the yield spread between the 10 year treasury and the XLP has widened in recent days, making the XLP marginally more attractive to investors seeking yield.  Further, we think it is possible that yield bearing assets in the U.S. (XLP and consumer staples stocks included) might see inflows to the extent that confidence in the European banks has taken a hit in the wake of the Cyprus situation.


Staples - Q1 in the Books, A Look Back - XLP vs. 10 year 3.30.13


Staples - Q1 in the Books, A Look Back - Yield Spread 3.30.13


Finally, taking a look at the performance of the XLP in relation to a basket of economic indicators and the performance versus consensus shows us that the broader economy continues to surprise to the upside (consistent with Hedgeye's macro call) driving performance of the XLP.


Staples - Q1 in the Books, A Look Back - XLP and economic surprises  corrected


Staples - Q1 in the Books, A Look Back - Economic Surprise Index



Where does that leave us?


Valuations suggest that we should stick to the sidelines, but it is difficult to ignore/fight improvements in the economy and money flows.  Therefore, we are going to stick with value where we can find it and our preferred list remains unchanged:

  1. ADM
  2. BUD
  3. CAG
  4. NWL

Our least preferred list could be much longer based solely upon our concerns surrounding valuations in the sector, but for the moment we will add two names as we approach Q1 EPS:


  1. KMB
  2. GIS
  3. TAP
  4. CL (new)
  5. K (new)

Enjoy the rest of your weekend.




Robert  Campagnino

Managing Director





Matt Hedrick

Senior Analyst

Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more

Amazon's New 'Big Idea': Ignore It At Your Own Peril

"We all see another ‘big idea’ out of Amazon (or the press making one up) just about every day," writes Retail Sector Head Brian McGough. "But whatever you do, DON’T ignore this one!"

read more